Preventing such disasters ultimately come down to timing of entry along with a good understanding of futures market volatility, market sentiment, and market knowledge. Additionally, experience, instinct and, of course, luck will also come into play. Yet, in my judgment option selling is a superior strategy in the long run.

As chaotic price action in the financial markets heat up, the VIX can see spikes into the 30 or 40 levels.

Three VIX Trading Strategies for 2021

However, in historically extreme circumstances such as the financial crisis, the VIX can trade into the 70s, or even higher. As a result, not all futures brokers offer access to trade it. The VIX futures market offers contracts expiring each month. For instance, fi the VIX moves from Assuming he is willing to accept the risk of participating in such a market, times of inflated expectations of volatility, and therefore over-priced options, are ideal conditions for an experienced option seller.

Unlike the VIX which is derived from the underlying futures price, among other factors, implied volatility is a component of option price. The implied volatility of a futures option, is the amount of volatility implied by the market value, or price, of the option. In other words, the implied volatility is forward looking in that it incorporates the current market precariousness as well as what market participants are expecting at some point in the future.

You may also find that market emotion and sentiment are a component of futures option implied volatility. As a sidelined options on futures seller, these types of conditions should be inviting. The premise of this approach is to attempt to sell options to buyers that are simply "late to the party". The key is making sure that as a seller you aren't too early. It is often the case that selling puts is more lucrative than calls, but the added reward carries baggage in the form of additional risk.

Due to the increased levels of risk, timing becomes crucial. By nature an option selling program in the futures markets tend to leave room for error in the execution. Nonetheless, being short puts in a spiraling market can quickly change that.

The VIX Futures Basis: Evidence and Trading Strategies

The phenomenon of put premium in the stock indices being larger than call premium is often referred to as the volatility smile. The volatility smile is a long observed pattern in which at-the-money options have lower implied volatility than out-of-the-money options along with the idea that there is more value in owning a put relative to an equally distant call.

This scenario seemed to be born after the crash of in the U. While there are no crystal balls to let us know when a futures market will turn around and how low that it might go before it does, being aware of historical patterns in price, volatility and market sentiment may help to avoid a compromising situation.

Armed with this knowledge, it may be a viable strategy to look at erratic, and many times irrational, trade as a point of entry for put sellers. For example, based on this assumption put sellers may have fared well during the lows in , and , and That is of course assuming that the option seller wasn't early in his entry.

If a short volatility trader enters a market prematurely, there is a strong possibility that the trader will be forced out of the market prematurely due to lack of financing or margin. Beginning in the middle of and throughout the beginning of , put sellers with savvy timing may have done very well.

However, trading is a game of risk and those selling puts during those times were accepting great amounts of risk in order to reap the reward. While the VIX is a great indication of volatility and extreme market sentiment, it is also helpful to look at indicators of volatility such as standard deviations. Luckily, the creation of Bollinger Bands allows us to visually determine market volatility through the line plot of two standard deviations from its mean.

Times of high volatility are denoted by wider bands, or a larger standard deviation, and times of decreasing volatility result in narrowing bands. As futures market volatility increases, so will option prices. During such times, commodity option buyers are forced to pay extremely high prices for options that in theory are more likely to expire worthless than not. On the other hand, option sellers are provided top dollar for accepting theoretically unlimited risk.

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The money collected for a short option can be viewed as "cushion" in that it defines the amount in which the trader can be wrong and still make money by shifting the reverse break even further from the market. The RBE of a short put is calculated as follows:. The individual legs and net prices of spread trades in the VX contract may be in increments of 0. Prior to , only monthly VIX futures contracts were traded on the CFE, but now, both monthly and weekly expirations in VIX futures are available and trade almost 24 hours a day during the weekdays.

The weekly contracts were introduced to provide market participants with more opportunities to play short-term VIX positions and fine-tune the timing of their trading and hedging activities. VIX futures weekly contracts are generally listed on Thursdays excluding holidays and expire on Wednesdays, but they have the same contract specifications as the monthly contracts. The Exchange may list for trading up to six near-term expiration weeks, nine near-term serial months, and five months on the February quarterly cycle for the VX futures contract.

All contracts are cash settled at expiration. Market orders are not accepted during the extended trading hours; only stop and limit orders are permitted. All order types market, stop, and limit orders are accepted during regular trading hours.

A lot of market factors can directly or indirectly impact the VIX futures prices, but the two major ones are these:. Contango and backwardation effects : The spot VIX Index tends to mean-revert at extreme values, and the futures market prices in this characteristic of the index. So, when the spot index is at very low values, the futures contracts sell at a premium contango.

When the spot index is at extremely high values, the futures contracts sell at a discount backwardation. The VIX futures give market participants the opportunity to speculate on the expected market volatility.

Strategies To Trade Volatility Effectively With VIX

You can find more info about futures market here. Signup Here Lost Password. Vix Futures Contract Specifications Symbol. Extendend session: p. Trading Ceases A. What is the VIX? Examples And What Causes them? Samuelsson 17 November, Samuelsson 21 May, Track Record Trading Signals! Algo Course 6 months. Sign up to our newsletter to get the latest news!

The VIX Futures Basis: Evidence and Trading Strategies - CORE

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